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What are the liquid currencies?  Hint:  If you're trading one of them - it's rather liquid.

Defining liquid currency pairs and explaining which ones are the most liquid is the objective of this article.  It's a Quora Thursday Article and this answer will be posted under the responses for the question.  This is a somewhat related topic to the last Quora Thursday Article concerning FX Liquidity for Brokers.  Jumping right into the exact query:

The actual question on Quora.

Defining the Terms for Liquidity

This requires a definition to start as some may not necessarily know the definition of the term 'liquid'.  There are two ways to define this term and they are very similar, but somewhat different.

Definition #1:

Liquid - In the financial sense, an asset is liquid if it is purchasable or easily sold without drastically changing the price of asset.

Definition #2:

Liquid - A financial term that describes how quickly or easily an instrument can be bought or sold regardless of the medium of exchange.

The differences may seem minimal, but the first speaks to the market element and the second version speaks to the ease, efficiency and indiscriminate nature of the value conversion.

Defining the Terms for Market Liquidity

The definitions are like building blocks.  Once the definition for the word 'liquid' is established, then the definition narrows for 'market liquidity'.

Market Liquidity - The ability to buy and sell an instrument on a market with ease and without altering the value of the asset in a drastic fashion.

When a market is liquid, in the derivatives market, positions taken are matched by counterparties without any issue and execute without any sort of a drastic market move.  Liquid markets also enable transactions without any delays or loss of value in the course of making the transaction.

Some markets are more liquid than others and trading volume often plays a role, which is why a penny stock is typically less liquid than a blue chip.

The Most Liquid Currency Pairs

As of January 2018, this is a Pie Chart of the Most Liquid Currency Pairs.  It is interesting to notice that XAU (Gold) and XAG (Silver) are considered currencies, when they are actually precious metals that used to be what backed the currencies prior to the advent of the most debased form of money, which is fiat currency (debt).

most liquid currency pairs - forex

There is no denying that the most liquid currency pair that exists is EURUSD (Euro-Dollar) and it is not surprising that the United States Dollar is the most traded currency in the world.  The U.S. Dollar is an essential part of many countries and banks' reserves.  It is not the world's "reserve currency", but it is the largest held currency that is held in reserves.  There have been efforts by India, China, and Russia to create a basket of currencies to reject the United States and its currency.

According to the Bank for International Settlements, in 2016, these were the most traded currency pairs.

Position  Currency Pair     Market Share %
1.            USD/EUR             23.1%
2.            USD/JPY             17.8%
3.            USD/GBP             9.3%
4.            USD/AUD             5.2%
5.            USD/CAD             4.3%
6.            USD/CNY             3.8%
7.            USD/CHF             3.6%
8.            USD/MXN            1.8%
9.            USD/SGD            1.6%
10.          USD/KRW            1.5%
11.          USD/NZD             1.5%
12.          USD/HKD             1.5%
13.          USD/SEK             1.3%
14.          USD/TRY             1.3%
15.          USD/INR              1.1%
16.          USD/RUB             1.1%
17.          USD/NOK             0.9%
18.          USD/BRL              0.9%
19.          USD/ZAR              0.8%
20.          USD/TWD             0.6%
21.          USD/PLN              0.4%
22.          USD/OTH             4.2%
23.          EUR/GBP             2.0%
24.          EUR/JPY              1.6%
25.          EUR/CHF              0.9%
26.          EUR/SEK              0.7%
27.          EUR/NOK              0.6%
28.          EUR/AUD              0.3%
29.          EUR/CAD              0.3%
30.          EUR/PLN              0.3%
31.          EUR/DKK             0.2%
32.          EUR/HUF             0.1%
33.          EUR/TRY             0.1%
34.          EUR/CNY             0.0%
35.          EUR/OTH             1.3%
36.          JPY/AUD              0.6%
37.          JPY/CAD              0.1%
38.          JPY/NZD              0.1%
39.          JPY/TRY              0.1%
40.          JPY/ZAR              0.1%
41.          JPY/BRL              0.0%
42.          JPY/OTH              0.9%
43.          Other Currency Pairs  2.3%

For those following recent events in Turkey and the crash of the Turkish Lira (TRY), notice that USD/TRY is the 14th largest currency pair in terms of trading volume.  EUR/TRY, which measures the Euro against the neighboring Turkish Lira is not even close to as significantly traded as the pair that would involve in the United States Dollar.

Prior to the existence of the Euro and the growth of the Euro as a currency, the currency pair with the greatest volume was USD/JPY.

The Role of the Broker with Offerings and FX Pair Liquidity

The FX Broker's role is to provide an array of currency pair offerings to trade.  The objective is to offer currency pairs with enough liquidity that it does not provide frustration when it comes to execution and so that institutional clients that need to convert currencies at their FX desks in their Treasury Departments are able to hedge properly.  Institutional clients are not looking to speculate, they are seeking the ability to hedge their currency risks while maintaining a global presence.

Some brokers will provide the ability to trade different currency pairs, but the most traded currency pairs are always held in common.  This is due to liquidity and demand of the client base.

An example would be USD/COP.  This is the U.S. Dollar vs. Colombian Peso.  Not all brokers offer this currency pair to traders, it is just not a popular pair to trade even though it features the most liquid currency and an emerging market country's currency.  Colombia is poised to be the economic leader of South America and even what is deemed to be Latin America and the Caribbean. 

Presently, this is too illiquid for some brokers, but with the growth of Colombia and more FX trading in the Americas, USD/COP will be more mainstream in the next decade and it will be one of the liquid currency pairs available.

most liquid currency pairs - colombia emerging market usdcop august 20, 2018

USDCOP August 20, 2018 1 Hour Chart Liquid Currency Pairs


Notice how the trading activity is very limited in terms of volume and there are gaps and periods where the rate remains the same even during the 24/5 trading period.

This is what a relatively illiquid market looks like, it is liquid during particular market hours, but it is not necessarily suitable for a retail trading audience.

There are completely illiquid currency pairs and those are found for countries that have problematic states of affairs in their own countries.  The Iranian Rial has such a case and the Iraqi Dinar is another example.

USDIRR, Daily Chart Illiquid Currency Pair Iranian Rial


Countries with developed economies and stable governments attract capital and this results in currency pairs associated with these countries' currencies to be more liquid.  Greater openness and a free-floating exchange rate also improve liquidity and the Major Currency Pairs reflect that.

When currencies are changing hands more often and the currencies are exchanged more often, the liquidity grows.

In short what does it mean to have a liquid currency pair?

It means that the currency pair has the following characteristics:

  1. It attracts trading volume on a 24/5 basis.
  2. Positions immediately have counterparties.
  3. Currency pairs are easily exchangeable.
  4. An individual trade will not change the value of the currency pair in a drastic fashion.

A good hint of a currency pair's liquidity is the bid/ask spread.  The lower the bid/ask spread, the more liquid the currency is at that given time.